NewRetirement Retirement News Digest : Retirement Plans

RETIREMENT AND RISK: Variable values

jberman — Sat, 21 Nov 2009 10:35:00 GMT

American Chronicle, November 19th, 2009

In the third part of a four-part series surveying the retirement market, Annie Shaw reports on investing in a low-interest-rate environment and the attraction of drawdown and variable annuity guaranteed income products

Pension savers coming up to retirement must have wondered what hit them over the past 18 months. Stockmarket falls wiped out a quarter to a third of assets held in equities, some cash turned out not really to be "cash" while any holding that really was in cash saw returns fall as interest rates went through the floor.

The risks associated with delaying taking an annuity could not have been demonstrated more clearly, not least for those in drawdown.

Yet, far from putting investors off drawdown, some advisers think that now could be the ideal time to opt for it.

Informed Choice managing director Martin Bamford says: "Now that pension fund values have recovered many of their equity-related losses and annuity rates look reasonably good, unsecured pension will look less attractive for many people.

"However, the attraction of unsecured pension is not simply limited to income levels. Many investors choose this option for the enhanced death benefits or the ability to access tax-free cash without taking a taxable income. As a long-term strategy for investors with other assets or sources of income in retirement and for those with larger pension funds, unsecured pension will remain a viable alternative to annuity purchase."

Drawdown has grown steadily since the option became available in the 1990s. Take-up rates took a knock after the internet bubble burst in 2002, and clients and advisers started to wake up once more to the downside risks but by 2006, drawdown had taken off again, reaching 21 per cent of the retirement income market.

In the same year, the FSA launched a consumer campaign to warn investors against the dangers of drawdown, particularly for those with small pension pots.

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Fidelity Says 401(k) Accounts Recover From 2008 Drop

jberman — Sat, 21 Nov 2009 10:33:00 GMT

Bloomberg, November 19th, 2009

Fidelity Investments said the average balance on customers’ 401(k) retirement accounts has returned to September 2008 levels on contributions and third- quarter investment gains.

Account balances in plans for U.S. workers benefited from the 22 percent year-to-date gain in the Standard & Poor’s 500 Index along with continuing employee contributions, the Boston- based firm said in a statement today, after reviewing 11 million accounts managed by Fidelity.

“The third quarter actually moved us into positive territory,” said Michael Doshier, vice president of Fidelity’s workplace investing group. “I think that surprised, if not everybody, a lot of people.”

Average account balances rose 13 percent to $60,700 from June to September, Doshier said, and are up 28 percent from $47,500 at the end of March. The gains include investment returns, employee contributions and employer’s matches. A typical 401(k) holds a mix of equities, bonds and cash.

The average balance was $58,400 at the end of September 2008. The S&P 500 Index lost 42 percent from Oct. 1, 2008, until touching a low on March 9. The latest figures are 12 percent below the average balance of $69,200 at the end of 2007, according to an earlier Fidelity survey.

Twenty-seven percent of companies that suspended their 401(k) matching contributions are beginning to make those payments again, according to Fidelity, the largest U.S. administrator of 401(k) plans. Companies have either reinstated the match or plan to do so in the next 12 months as the economy recovers, Fidelity said.

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4 ways to face a cash-strapped retirement

jberman — Sat, 21 Nov 2009 10:30:00 GMT

Bankrate, November 20th, 2009

Dear Debt Adviser,
Help, I'm about $30,000 in debt. I have about $50,000 in my retirement. I will be 59½ years old in January. I had to go on disability from a fall at work. My house is paid for. Should I just take money out and pay off my loan? Could I just hire someone to (advise me)? I don't know what to do and am at my wits' end. I am not behind on any bills.

Dear Doris,
You worry me. You are nearly 60, have saved little and spent much. Now you are out of work and ask me if you should hire someone? My suggestion is that you get rehired as soon as possible and develop a plan for building up your savings, paying down your debts and preparing for retirement.

Before you say, "I don't plan to retire for a long time," consider that many people end up having to retire before they plan to due to illness, injury or job loss. You may be late getting started on a financial plan, but I suggest that you put one together now before it's too late!

Let's start with these four major moves:

Begin by setting some realistic goals, such as when you want to retire and how much you will need to do it.
Put together a budget that will allow you to save the money needed to meet your goals and begin to pay down your debt.
Find a financial planner to do some serious retirement planning.
Consider how you can use the equity in your home for debt repayment and retirement planning.

You can get help with all of these tasks and it shouldn't cost you anything. A credit counselor can help you with goal-setting and budgeting, a financial planner should do a review of your finances and make suggestions and a local banker can help you understand what options you have for tapping the equity in your home.

As you are only three years away from 62, I especially want you to look into how a reverse mortgage might fit into your plans. Simply put, a reverse mortgage provides a monthly payment to you that extends your income while you stay in your home. Most reverse mortgages require you to be at least 62 years old.

You asked if you should use your retirement money to pay off your debt. I don't recommend that you tap into your retirement money at this point. If your disability is permanent, then you need to rebalance your budget to assure that your monthly expenses can be met with your disability income. Should your disability not be permanent, the sooner you can get back to full salary, the better.

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Covering the Bases: Understanding the options if you're new to Medicare

jberman — Tue, 17 Nov 2009 10:35:00 GMT

Annapolis Capital, November 15th, 2009

Q: I am new to Medicare. I have my Medicare Part A and Part B. I elected a Medigap plan to complement my Medicare A and B. However, I am not on any medicines and so do not see the advantage for enrolling in Medicare Part D. What are the advantages of having Part D?

A: Insurance is a contradiction. You pay good money for something you hope you never need. We pay homeowner's insurance and hope we never have a fire. We pay auto insurance and hope we never have a car accident. Health insurance is the same. We pay our premiums and hope we never are in need of a doctor or a hospital.

The same is true of Medicare Part D. Many people are not taking any prescriptions. However, it is advisable they consider Part D. Many people are aware that if they delay in enrolling in Medicare Part D they will incur a penalty if they enroll at a later date.

However, the more concerning scenario are the "healthy" people who forgo Medicare Part D and then have an unfortunate, unexpected illness. The most poignant illustration is a "healthy" person who is newly diagnosed with an illness such as cancer, diabetes and/or heart disease. The medical treatment of such illness can be extremely expensive. By having prescription insurance, you are protecting yourself if you need high-cost medicines.

Q: I am new to the area. I have original Medicare and Medigap supplemental insurance. I have already contacted Medicare to change my Part D to a Maryland plan. My question is, how do I find a doctor in this area?

A: Medicare has a wonderful database of providers. You may call 800-MEDICARE and they can assist you with finding a doctor. You may also log on to www.medicare.gov and click on "Find a Provider in Your Area." This tool allows you to search by location and by specialty.

Q: My mother was admitted to a rehabilitation facility after her hospitalization for her broken hip. She remained there for 35 days. I was told her Medicare Part A covered up to 100 days of rehab. However she received a bill for $2,002.50 for days 21 through 35. Why?

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The Age of Reason: Financial Decisions over the Life-Cycle with Implications for Regulation

jberman — Tue, 17 Nov 2009 10:31:00 GMT

Social Science Research Network, November 15th, 2009

Many consumers make poor financial choices and older adults are particularly vulnerable to such errors. About half of the population between ages 80 and 89 either has dementia or a medical diagnosis of "cognitive impairment without dementia." We study lifecycle patterns in financial mistakes using a proprietary database that measures ten different types of credit behavior. Financial mistakes include suboptimal use of credit card balance transfer offers, misestimation of the value of one's house, and excess interest rate and fee payments. In a cross-section of prime borrowers, middle-aged adults make fewer financial mistakes than younger and older adults. We conclude that financial mistakes follow a U-shaped pattern, with the cost-minimizing performance occurring around age 53. We analyze regulatory regimes that may help individuals avoid making financial mistakes. Some of these regimes are designed to address the particular challenges faced by older adults, but much of our discussion is relevant for all vulnerable populations. We discuss disclosure, nudges, financial driving licenses, advanced directives, fiduciaries, asset safe harbors, ex-post and ex-ante regulatory oversight. Finally, we pose seven questions for future research on cognitive limitations and associated policy responses.

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Half of Laid-Off Workers Raid 401(k)s

jberman — Fri, 06 Nov 2009 10:27:00 GMT

US News & World Report, November 4th, 2009

Almost half of laid-off workers succumbed to the temptation of spending their retirement stash last year. Some 46 percent of retirement savers who left their job in 2008 cashed out their 401(k), according to a new Hewitt Associates study of 170,000 401(k) participants who terminated employment last year. The rest kept their savings in their prior employer’s 401(k) plan (29 percent) or rolled the money over into an IRA or a new employer’s 401(k) plan (25 percent).

[See 7 Things to Consider Before You Move Your Nest Egg into an IRA.]

Workers with small 401(k) balances were the most likely to raid their retirement account. Some 85 percent of retirement savers with balances under $1,000 cashed out or were forced out of the plan due to low balance provisions and 45 percent of employees with between $1,000 and $5,000 saved for retirement withdrew the cash. More diligent savers generally left their retirement stash to further accumulate, tax deferred. Just 17 percent of workers with between $20,000 and $99,999 in their retirement account requested a cash distribution and only 8 percent of those with 6 figures accumulated cashed out.

[See 5 Ways to Protect Your 401(k) if You're Laid Off.]

Younger employees also tended to withdraw the cash and pay the resulting penalties when they left a job. Some 60 percent of 20-something employees took a cash distribution from their 401(k) compared to 34 percent of those in their 50s. But 20-somethings give up a huge amount of compounding interest when they cash out even small balances. For example, an employee who cashes out $5,000 from a 401(k) at age 25 will receive just $3,500 after paying a 10 percent early withdrawal penalty and income tax, assuming the worker is in the 20 percent tax bracket. If the same worker simply left that $5,000 in a tax-deferred account and earned a 7 percent return annually, he would have $75,000 at age 65, according to Hewitt calculations.

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3 steps to a better retirement

jberman — Fri, 06 Nov 2009 01:57:00 GMT

CNN Money, November 3rd, 2009

Question: My husband and I are in our late '50s and haven't put anything away for retirement, although we do own our home. We figure we'll work another 10 years or so before retiring. Do you have any helpful suggestions for us so we won't have to live solely on Social Security? --Peggy, Rockvale, Colorado

Answer: Sure, I've got a few recommendations. But since there are no secret formulas or magical fixes for making up for a lifetime of saving little or nothing (aside from what you have in home equity), I doubt that most of them will come as blinding revelations to you.

What you may find surprising, though, is how much you can still improve your retirement prospects if you really commit, even though you're getting a relatively late start.

1. Save, save, save

The first thing you've got to do is start socking away as much as you possibly can. Ideally, you'll do this saving in 401(k)s, IRAs or other tax-advantaged retirement accounts, although barring that, plain-old taxable accounts will do.

Granted, starting from scratch in your late 50s isn't an ideal position to be in. But it's not hopeless either; you still have time to accumulate enough of a retirement stake to make a difference in your eventual standard of living.

You say that you expect to work about 10 more years. Even if you can manage to save just $250 a month over that period, you would have a nest egg worth roughly $43,000, assuming a 7% annual return. If you can boost the amount you put away to $500 a month, you'll end up with twice that amount, or $86,000, and if you manage $1,000 a month, you'll have $172,000.

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Ways to Ease the Pressure of a Cash Crunch

jberman — Thu, 05 Nov 2009 10:21:00 GMT

The New York Times, October 16th, 2009

MANY retirees are in a cash crunch — with a lower income stream from their investment portfolios, personal expenses that are higher than expected, or both.

While most assets can be used to generate liquidity, deciding what to do requires careful deliberation; there are many pitfalls. Here are the most commonly used approaches for people who find themselves coming up short during retirement, and an analysis of their pros and cons.

CASH FROM YOUR HOME Mortgage rates are so low that many financial planners say the best way to raise money is to take out a conventional mortgage or a home equity line. But reverse mortgages, which allow homeowners who are at least 62 to borrow against the equity in their homes and receive regular monthly payments, are often seen as a last resort. Some financial planners even advise retirees to sell their investment portfolios or cash in their life insurance policies before taking out a reverse mortgage.

Unlike traditional mortgages or home equity lines, a reverse mortgage requires no payments until the borrowers die or no longer use the home as their primary residence. Then the mortgage must be paid in full. Closing costs, fees and interest rates are also generally high, reducing the amount of money that borrowers can leave to their heirs. Yet if retirees have exhausted other options, a reverse mortgage may be worth considering, especially for those with high medical expenses, said Alicia H. Munnell, the director of the Center for Retirement Research at Boston College. “If you’re not planning on leaving your house to a child, then this is an option, rather than depriving yourself during your lifetime,” she said.

TAPPING LIFE INSURANCE Retirees often decide that they no longer need life insurance once their children are grown. If they own whole-life policies, which have an investment component, and want to drop them, they can either cash them in with their insurers or sell them to investors, who will pay the premiums until the policyholders die. An advantage of dealing with investors is that you can sometimes get a better deal than from the insurance company.

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For Financial Planners, a Year of Tough Questions

jberman — Thu, 05 Nov 2009 10:06:00 GMT

The New York Times, October 16th, 2009

If you think you’ve had a hard time reckoning with your own finances in the last 18 months, try putting yourself in the shoes of the financial planners who’ve been answering to scores of unhappy clients.

The planners, after all, were the ones who were supposed to help their clients avoid trouble in the first place. “I feel like I’m finally able to leave the witness protection program,” said Ross Levin, president of Accredited Investors in Edina, Minn. “There has been a loss of confidence in us and in the world, and a sense of betrayal. They did everything we told them to do, and it seemed like it didn’t work out.”

Though markets have improved, they are still far from where they once were, and that has made for some difficult discussions between financial professionals and their clients.

I wanted to find out more about those conversations. How much were clients pushing back, for example, and what were they saying? That was the main reason I moderated a discussion last Sunday at the Financial Planning Association annual meeting in Anaheim, Calif. (I received no compensation for my role there.)

While the planners were resolved and well rehearsed in front of hundreds of their peers, it was also clear that they had been severely tested in the last year. During the hourlong session, I quizzed five of them about the toughest questions their clients had asked. Here are those questions, along with the planners’ responses.

PREDICTING THE FUTURE So why didn’t most financial planners see all of this coming? Weren’t the signs obvious?

“This question actually presumes that there is something wrong with not having seen this coming,” said Elissa Buie of Yeske Buie, with offices in Vienna, Va., and San Francisco. “We live in a chaotic system, and chaotic systems are not predictable. But we know the range of possibilities, and this was always a possibility.”

Though most clients tend not to remember it years later, good financial planners will generally sit down at the beginning of a relationship, after clients have declared the sort of risk tolerance they think they have, and remind them how bad things can get in a truly outlying year. Well, 2008 into 2009 was one of those years.

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Choosing a Policy to Cover What Medicare Doesn’t

jberman — Wed, 04 Nov 2009 10:18:00 GMT

The New York Times, October 14th, 2009

PEOPLE over 65 should buy a Medigap policy, consumer advocates say, but picking a Medigap plan can be difficult, and at least one important health care bill heading for a vote in the Senate could make it even harder.

The plans, which are sold by private insurers, are supposed to help fill the considerable gaps that deductibles and co-payments leave, the difference between what Medicare enrollees receive from the government and what they owe doctors and hospitals. Medigap offerings come in a dozen different varieties, labeled Plans A to L.

Choosing a plan is particularly tricky for consumers because monthly premiums for identical coverage can vary by hundreds of dollars from one company to another. Rates also vary by area of the country and age of the enrollee, and in many cases by gender. Still, the advantages of the coverage, for everyone who can afford it, make the hard work of shopping around a good investment.

Why buy a Medigap policy when you turn 65 and become Medicare-eligible, even if you don’t expect to need it for years? A reason, of course, is that people cannot anticipate what might befall them. Consumer advocates also point out that under some state laws, those who delay end up paying higher monthly rates or being rejected for health reasons.

Adding complexity to the calculation is the possibility that Congress may cut back on the current 100 percent coverage of medical bills for people who wait to buy their first Medigap policy. The Senate Finance Committee, looking ahead to 2015, is calling for new co-pays for doctors’ visits under Medigap. If the provision is adopted, new purchasers might be charged $5 for a visit to a primary care doctor and $15 or $20 for a specialist, committee aides say. The change is intended to discourage medically unjustified visits.

Darlene Mastro, who had retired early, said she “couldn’t wait” to be 65 and eligible for Medicare. But when she telephoned the local offices of several companies to ask about Medigap insurance, she was disappointed by the response.

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Medicare: What to expect, what you should know

jberman — Tue, 03 Nov 2009 01:34:00 GMT

Detroit Free Press, November 1st, 2009

QUESTION: What kinds of changes are we seeing in Medicare this fall in Michigan?

ANSWER: There are two primary changes. The first is there are fewer plans being offered and secondly the prices of the plans being offered are increasing.

Q: Without exception?

A: Almost across the board except for a handful of plans with little change.

Q: Why are prices going up?

A: The insurance companies say the prices are going up to reflect increased prices in the marketplace.

Q: What do we know about the Medicare choices seniors in Michigan have made in the past? What percentage is in Medicare Advantage plans and so on?

A: In the past, Michigan was pretty lucky because relatively three quarters of the population were in some type of retiree plan sponsored through their former employer. However, that trend is changing as many of the employers are dropping, reducing or changing the structure of their employee health benefits.

Q: So more people have to purchase their own Medicare plan?

A: Yes.

Q: Is there still a lot of confusion?

A: Yes. There are some people new to this whole process because their retiree benefits are changing. But each year there are changes in the plans, too. Sometimes the plans changing have huge changes or they are exiting the marketplace. I think there was a misconception in the public that 'Once I get into a plan, I'm set, if not for life but at least a few years.' There can be drastic changes.

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This retirement-plan building block is cracked

jberman — Sat, 31 Oct 2009 04:51:00 GMT

Marketwatch, October 30th, 2009

The rule of thumb is that you'll need to replace 70% of your pre-retirement income on average once you retire, but evidence continues to mount that this assumption by many professionals and retirement savers is way off base.

Now, a new study by two professors casts further doubt on the idea that the widely used replacement-rate figure is a sound basis for building a retirement plan.

"The rule of thumb that replacement rates should be above 70% to maintain living standards in retirement is conceptually flawed," wrote John Karl Scholz and Ananth Seshadri, two University of Wisconsin-Madison professors, in their paper "What Replace Rates Should Households Use?"

In fact, no more than 15% of the population Scholz and Seshadri studied need to replace 65% to 90% of their pre-retirement income. And almost 50% of the population needed to replace less than 65% of their pre-retirement income.

In short, the authors said: More refined guidance is needed to serve households well.

Costs usually decrease in retirement

Target replacement rates are less than 100% for three main reasons, according to the study published by the Michigan Retirement Research Center.

"First, upon retirement, households typically face lower taxes than they face during their working years, if for no other reason than Social Security is more lightly taxed than wages and salaries. Second, households typically save less in retirement than they do during their working years, so saving is a smaller claim on available income. Third, work-related expenses generally fall in retirement."

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Unsolved Mystery

jberman — Fri, 30 Oct 2009 07:38:00 GMT

Retirement Income Journal, October 29th, 2009

The “mystery shopper” is one of the oldest and most effective research tools. You can learn a lot simply by having someone pose as a naïve consumer and catch a seller off-guard.

Journalists use this trick. Industrial spies use it. The Drug Enforcement Agency, obviously, uses it. So do market researchers.

A couple of years ago, the Washington researcher and consultant Mathew Greenwald deployed mystery shoppers to help annuity manufacturers and marketers learn why more Americans don't buy life annuities to finance their old age.

In a two-part experiment, Greenwald first asked a bunch of academic economists whether the typical Boomer retiree should buy an annuity. “We know that annuitization is rarely used, and all kinds of reasons have been given for that, but I wanted get some insights into the desirability of an annuity,” Greenwald told RIJ recently.

In other words, if no one at all vouches for annuities, further research would be pointless. “Game over,” as it were. But all of the academics recommended annuities.

“I interviewed 11 economists and others who are not involved in selling annuities,” Greenwald continued. “They all had different opinions about the circumstances that call for annuities. Some thought you should buy one at retirement. Some thought you should wait until age 70 when the payouts are higher, or that you should buy longevity insurance that starts when you're 85.”

But, small differences aside, the academics unanimously supported annuities.

In the second part of the experiment, Greenwald recruited eight mystery shoppers and assigned each of them to approach an investment advisor and ask for help in creating a financial plan for retirement. “They went to advisers and said, I'm close to retirement, and I'd like your advice on how I should manage money in retirement.”

The mystery shoppers were all real near-retirees with assets of roughly $600,000 to $3 million. The advisors were registered reps at large broker-dealers such as Wachovia, Morgan Stanley or Raymond James. The meetings between clients and advisors were not a sham. The shoppers presented real account statements and, in some cases, financial plans were drawn up and fees were paid.

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Ask the Experts: Do your homework on reverse mortgages

jberman — Thu, 29 Oct 2009 01:35:00 GMT

Sacremento Bee, October 28th, 2009

Our three new "Ask the Experts" writers have been busily answering financial questions this month from online readers.

Here's a sample of their advice on personal finance, wills/estates and investing.

To see more questions or to get advice from our other financial experts on taxes, banking and investment clubs, go to: www.sacbee.com/ask.

Pamela Christensen, Certified financial planner

I expect to retire in about four years and will have a small Sacramento County retirement. We also have about $150,000 in CDs to live on. My parents got a reverse mortgage a couple years ago for the extra cash to live on and to have no mortgage payment. It seems to be working for them and we are considering it as well. Is this type of mortgage safe?

As with most financial planning, these issues are very individual. I like reverse mortgages in some situations, although it's always wise to get lots of counsel on your particular circumstances and the ramifications. For instance, do you have heirs in line to inherit your house? Do they want or need it? How much equity do you have in the home?

Do your homework and learn as much as you can. Start by going to the federal Department of Housing and Urban Development Web site (www.hud.gov) and search for "Reverse Mortgages." There's also information on the state Department of Real Estate Web site (www.dre. ca.gov). Click on "Consumers", then "Home Buyers/Borrowers," then "DRE Publications and Resources." Talk to your estate planning attorney and other financial professionals to get their opinions. Talk with family and friends only if you know they are well educated in reverse mortgages.

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Seniors should be wary of healthcare pitches

jberman — Wed, 28 Oct 2009 01:27:00 GMT

Los Angeles Times, October 27th, 2009

Senior citizens should be on their guard against possible fraud when open enrollment for two popular healthcare programs begins Nov. 15.

California Insurance Commissioner Steve Poizner warns that some sales agents for the Medicare Advantage and Medicare Prescription Drug programs may engage in "aggressive or deceptive" sales practices starting from now until open enrollment ends Dec. 31.

To better protect themselves, consumers should consider these tips:

- Make sure the salesperson is a licensed insurance agent.

- Do not respond to "cold calls," which are prohibited by law.

- Don't give out personal information such as Social Security or Medicare numbers.

- Do not accept "free lunches," which are not allowed.

- Don't buy any additional insurance-related products.

- Read and understand the health insurance plan.

- Call the California Department of Insurance with questions or complaints at (800) 927-HELP (4357) or Medicare at (800) MEDICARE (633-4227) with questions or complaints.

For more information, consumers should visit www.insurance.ca.gov or www.medicare.gov.

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